[FOUNTAIN]When politicians talk of interest rates

In August of 1988, three months before the U.S. presidential election, Treasury Secretary James Baker, who was running then-Vice President George Bush’s campaign, said on television that he did not think the Federal Reserve Board would raise the interest rate. Two days later, the board decided to raise the discount rate by 0.5 percentage points. According to Bob Woodward’s “Maestro,” a biography of Federal Reserve Board Chairman Alan Greenspan, the chairman went to see Mr. Baker and said, “We’re announcing a rate increase within the hour.” Mr. Baker pointed to his stomach and said, “You know, you just hit me right here.”
Mr. Bush, who was elected president, waited until a month before the end of Mr. Greenspan’s term to announce his reappointment, in July, 1991. A New York Times editorial said the White House had delayed the announcement to pressure Mr. Greenspan to lower the interest rate. With the 1992 election ahead, Mr. Greenspan reduced the rate twice, in July and September; but he resisted the pressure to do so a third time, just before the election, and Mr. Bush lost.
In Korea that same year, with a presidential election scheduled in December, there had been talk of an interest rate cut since September. Then-Finance Minister Lee Yong-man called for one, but then-Bank of Korea Governor Cho Soon held out to the end. Mr. Cho was abruptly replaced the following March, with three years left in his term.
Presidential adminstrations and governing parties tend to like interest rate cuts, especially before elections. They think they will benefit from the economic boost. The negative effects, such as price increases and real estate and stock bubbles, come later, so they are often ignored. This is why economists value the independence of a central bank.
Some have recently insisted that an interest rate hike is needed to burst the real estate bubble, but the governing party and the Finance Ministry said it was not the right moment. They have abused their authority and pressured the Bank of Korea. Regardless of whether a rate hike is needed or not, the raising of the issue makes it seem like election season is not so far away.

by Lee Se-jung

The writer is an editorial writer of the JoongAng Ilbo.